Market Share Newsletter Vol 4 Issue 11

 

May 24, 2022

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We frequently explain the importance of asset allocation, and this topic is especially important as we trek through increased volatility across bonds, stocks, and alternative investments.
 
It may be cliché, but it is important to reiterate that we believe in broad diversification as a way to manage risk, grow assets, and preserve wealth within each client’s investment portfolio. This is a core tenant in our investment philosophy and one that we constantly hone. We invest across different assets and sectors, including both high risk and low risk assets, and we do it to reduce the overall risk within our clients’ portfolios and to capitalize on investment opportunities in the long-term. Even appropriately allocated portfolios will sometimes experience negative returns in the short-term.
 
As part of the philosophy, asset allocation allows us to enhance returns as one asset category may not be performing well but another is providing positive or better returns. For the past ten years (through May 22, 2022), large-cap stocks have returned an annualized 13.7% as measured by the S&P 500, while small-cap stocks have only returned 10.2% as measured by the Russell 2000. For the prior ten years, small-cap stocks outperformed the S&P 500—5.6% in comparison to 3.9%. It may not always be advantageous to own small-cap stocks, but there will be many periods where it is the best performing asset class as the domestic economy expands and outperforms international economies.
 
Core to any investment philosophy of asset allocation should be the removal of timing the markets. Yes, we make tactical shifts like shortening the maturity of our fixed income portfolios or increasing value stocks relative to growth stocks, but we do not time entry and exits to the market. Research shows that the best days in the market typically occur after the largest drops. We buy high quality investments that will stand the test time and the volatility that will be experienced throughout full market and economic cycles.
 
The Greek definition for philosophy is the “love of wisdom.” We do not write this today to proclaim our wisdom, but to let you all know that we relentlessly pursue it and we utilize our judgement, knowledge, and experience in managing investment portfolios. It is a privilege to work for you and thank you for the opportunity to be of service to you and your family.
 
Paul Gifford, CFA
Chief Investment Officer
Wealth Advisory Services
Investment Management Group
GiffordP@1stsource.com
Erik Clapsaddle, CFA, CFP®
V.P. and Sr. Fixed Income Portfolio Manager
Wealth Advisory Services
Investment Management Group
ClapsaddleE@1stsource.com
Considerations for your portfolio

The Economy

  • Retail sales increased by 0.9% month-over-month (MoM) in April and retail sales (excluding auto and gas) increased by 1.0% which was better than the expected increase of 0.7%. The Federal Reserve’s most recent release of consumer credit showed an increase of $52.4 billion, which feeds directly into retail sales. Revolving credit, which is largely credit cards, increased by a record $31.4 billon. There were a record 537 million credit card accounts opened in March based on data from the Federal Reserve Bank of New York.
  • Single family housing starts declined by 7.3% MoM in April and tumbled in the Midwest by 13.6%. The only region in the U.S. that recorded growth in single family housing starts was the West as it was up 1.4% MoM. Multi-family housing continues to drive housing starts in the U.S. as more individuals have turned to renting due to elevated housing prices and the recent increase in mortgage interest rates. Multi-family housing starts increased by 15.3% MoM in April.
  • The labor markets continue to be strained as job openings in the United States remain above 11 million and reached another record in March of 11.55 million openings. The total unemployed persons in the U.S. is at 5.9 million. Despite that, initial jobless claims rose to their highest level since January 22 to 218k for the week ending May 14. Claims are still very low as they have averaged 380k over the past 30 years.
  • The Conference Board Measure of CEO Confidence dropped to its lowest level since the beginning of the pandemic and fell below 50, meaning that there were more negative than positive responses. Only 14% of CEOs responded that general economic conditions were better than six months ago and 60% of CEOs expected future economic conditions to worsen—up from 23% in the first quarter. Almost 50% of CEOs are diversifying global source countries, not solely through North American countries, to avoid future supply disruptions.
Economic Data: Recent
  Actual Survey Prior
FOMC Rate Decision 0.75%-1.00% 0.75%-1.00% 0.25%-0.50%
Retail Sales Advance 0.9% 1.0% 1.4%
Consumer Price Index (CPI) MoM
0.3% 0.2% 1.2%
Change in Nonfarm Payrolls 428k 380k 428k
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   353k 428k
Conference Board Consumer Confidence   104.0 107.3
Durable Goods Orders MoM   0.6% 1.1% 
Unemployment Rate   3.5% 3.6% 

Equities

  • TJX Companies, parent company of T.J. Maxx, Marshalls, and HomeGoods, reported a good quarter as revenues were slightly behind consensus, though up 13% year-over-year, and adjusted earnings per share were $0.68 relative to the lower forecast of $0.60 per share. The company’s largest division reported same store sales growth of 3% and was attributed to an increase in customer traffic.
  • Many retailers have released disappointing quarterly earnings over the past two weeks largely due to inflationary pressures on their margins. Brian Cornell, the Chairman and CEO of Target, notably said “we did not anticipate the rapid shifts we’ve seen over the last 60 days.” The company was expected to earn $3.07 per share, but only earned $2.19 as their operating margin dropped from 9.8% in the previous quarter to 5.3% in the most recent quarter.
  • The FTSE 100, which comprises the 100 largest companies on the London Stock Exchange (LSE), was up approximately 3.5% year-to-date (YTD) through Monday and the best performing index YTD. The best performing stocks within the LSE have been Shell (+46%), BAE Systems (+40%), and Glencore (+38.5%).
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,973.8 -16.13% -6.31%
Dow Jones Industrial Average 31,880.2 -11.56% -7.00%
NASDAQ Composite 11,535.3 -26.03% -18.08%
Russell 2000 (small-cap index) 1,792.8 -19.81% -20.76%
MSCI EAFE (developed intl.) 2,004.7 -12.50% -10.91%
MSCI Emerging Markets 514.3 -15.45% -20.25%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Interest rates have spent the most of May declining as the two-year U.S. Treasury note declined from 2.78% to back below 2.5% and the 10-year note has moved from its high of 3.2% down to 2.75%. Rates have fallen as recession fears have arisen and the idea of the Federal Reserve hiking a more rapid pace has subsided. We still expect the Fed to hike rates throughout 2022 due to inflation and very tight labor markets, but we have no expectation of them hiking rates too high.
  • The European Central Bank (ECB) announced they would likely increase its deposit rate out of negative territory by September. The rate is currently at -0.50%, meaning banks were charged to deposit money at the ECB. Additionally, the ECB has opened the door to possible additional rate hikes in the future beyond just moving out of negative territory.
  • The price of natural gas has risen by more than 200% over the past 12 months. The tensions with Russia have accelerated the price increase as most of that increase has happened in 2022. Additionally, Europe has announced import cuts of gas from Russia and will replace it with liquified natural gas (LNG) from the United States and Africa, which additionally has put price pressures on gas.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 3.19% -6.16% -6.46%
B’berg Barclays US Aggregate Bond 3.47% -9.54% -8.66%
B’berg Barclays US Corp.High Yield 7.79% -10.84% -7.97%
B’berg Barclays Municipal Bond 3.38% -9.91% -9.13%
Key Interest Rates
  5/23/22 12/31/21 5/25/17
Federal Funds Target Rate 0.75-1% 0-0.25% 0.75-1%
3-Month LIBOR 1.51% 0.21% 1.19%
2-Year U.S. Treasury Note 2.62% 0.73% 1.28%
10-Year U.S. Treasury Note 2.85% 1.51% 2.25%
Prime Rate 4.00% 3.25% 4.00%
Commodities & Currency
  5/23/22 12/31/21 YoY Change
Gold 1,853.9 1,835.9 -1.48%
Crude Oil 110.3 75.2 66.92%
Natural Gas 8.74 3.73 202.36%
Corn 786.3 593.3 17.99%
Soybean 1,687.0 1,328.8 10.49%
USD: Euro 1.069 1.137 -12.19%
 
Fixed Income chart
Source: Bloomberg
 
DISCLOSURES
The information in this email was prepared from sources believed to be reliable; it is for informational purposes only and does not provide recommendations based on the investment objectives, financial situation, or needs of any individual or entity. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets. The information in this email is not a comprehensive statement of the matters discussed. Unless specifically indicated otherwise, this email is not an offer to sell or a solicitation of any investment products or other financial product or service or a confirmation of any transaction. If you have questions about the information in this email, please contact your trust administrator at 1st Source Bank Wealth Advisory Services or call 800 882-6935. Investment and Insurance products are:
  • Not insured by the FDIC or any Federal Government Agency
  • Not a deposit or other obligation of, or guaranteed by, the Bank or any bank affiliate
  • Subject to investment risks, including possible loss of the principal amount invested

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.